With a high net-worth, can you keep your emergency fund in stocks?

[Tim]

Call it what you want, liquidity as needed. Selling in taxable would likely cost you taxes. The tax rate is much more than any loan.
FYI. Different needs for timing, it is not necessarily overnight. I wouldn't think S&P 500 MF or ETF would be wise.

[Lordosis]

What is your cash flow like? You have a pretty big net worth for somebody your age and you have a decent salary but it is not ginormous did you save all that money yourself or was there help from an inheritance or something else? I only ask because if you are able to save up one to 200k in a year or so you are pretty flexible.

Also it seems silly to be wealthy but not be able to access any cash. Someone I know who from all outward appearances appears very wealthy I remember a situation where their CPA messed up and they owed an extra $25,000. They were able to get the money eventually but I would have expected this to be a rather simple thing to just write a check.

[burritos]

what is considered high net worth

[Tangler]

posts like this , and the one the other day when the person wanted to “invest” money needed for quarterly tax payments in stocks make me wonder:

irrational exuberance? bubble?

Seems strange that someone would ever ask these type of questions?

Maybe it is just a sign that i am getting old.

Answer: SH!$ happens! Have some cash.

[Tangler]

1. You don't have a crystal ball. Market will go down or up.
2. Again, market timing. You do not know where the market is headed and when you'll need the money.
3. What if the market goes down? Now you don't pay taxes on the new money you put in and pulled out, but you have to pull out "positive" money to make up for the lost money.

Anything you are purchasing within 5 years should be in the bank. Our emergency accounts are at a bank offering 3% up to $15k/account and then ally for our planned big purchases.

where are you getting 3% on cash????!!!
That is amazing! I get less than 1%

[Hatton]

Emergency funds will vary over the course of your career. When I was practicing and owned a solo practice I kept a separate account at my brokerage nicknamed "business account". This account held upcoming malpractice payments and tax estimates. This account had up to $300k. It was invested in MMFs or treasuries. In my local practice checking account I kept extra money (working capital) also. This cushion was usually $5-10k. When I was doing this I really kept no significant E fund. I always knew if something very bad happened I had some cash. Usually I cash flowed cars and home renovations.

[Tangler]

If you have 2 million make over 300k and spend 110k then it is like this: College football game
you are winning 45-0, halftime, they cannot stop anything. You can run, pass, and there D is clueless.
your D is killing them. they cannot even get a first down. You don’t need to come out in second half running complicated double reverse pass plays and flea flicker plays and other nonesense.
Just run the ball up the middle, and run out the clock, there D cannot stop you and the O-line is crushing them. run down the clock, and put in the backups. No need to try to hang 70 on them. Why risk hurting your first string? Next week might be a different game!

[Dont_know_mind]

Minimize your maximum regret. If you keep your down payment/emergency fund at Ally (or even a MMF) you are foregoing market gains for the next few months, maybe a year. Let’s say you give up 10% gains on $150k, or $15k. No biggie, right? Alternatively you dump it all in the market. Goes up for a bit, and the COVID vaccines turn people purple. Stock market drops 50%. Just focusing on your emergency fund, it is now worth $75k. Will you pull it out, plus another $75K you make up from your previous stock investments to buy a house? I doubt it. Will you actually cut back at work for the newborn with the market down 50%. Only you can say, but hint from an old married guy - no. Would you pull it out for an emergency? Well, sure, is an emergency. But now you are suffering a double whammy by selling low and having to dip into principal so to speak because your emergency fun is now only half.

Johanna has a nice rule: nothing in the market you need to spend in three years. Sounds like wisdom to me.

By the way, the Early Retirement Now blog says this conventional wisdom is wrong as regards emergency funds. (I think he would agree that savings for a specific purpose like house down payment should not be in the market.) He argues your High income is enough of a buffer. I like his analysis but I think his psychology is terrible. Keep anything you plan to spend out of the market.

Some of what ERN writes is nonsensical.

Maybe I am misremembering but I think he had an article about how your house is like a bond with owners equivalent rent. I thought about it and some of the other stuff like this that has been written about property (that your house is not an asset) doesn’t make much sense and is presented as fact.

[Dont_know_mind]

I know that it's generally advised to keep things like your emergency fund and money saved for a downpayment in a safe, non-volatile place. The reasons for this that I am aware of are:
1) you don't want to lose your emergency fund or downpayment
2) you don't want to have to take your emergency fund out of the market at a loss
3) you don't want to pay taxes on your emergency fund if you take it out at a gain

But does this general rule still apply if you have a pretty comfortable net worth?

We have a little over 2 mil saved and are in our late 30's.
We also don't own a house and so we've saved ~150K for a downpayment in Ally bank.
We're looking to buy a home but right now the market is crazy. We can't stop what we're doing to go look at homes in the middle of the week and it seems like homes sell in just a few days. So if we can't find something, we're fine with continuing to rent until the market cools down. Our home buying plan seems to keep getting pushed off.

My car is also 20 years old and could break down at any point. If we have another kid, my wife plans to stop working for a year or so and I might cut back for a little while and our income will drop. Our combined income is around 370K pre-tax. We spend around 110K currently (40K is for nanny). If we have second kid, we might both temporarily go half time to keep our sanity (our toddler never sleeps through the night and needs constant attention). In addition, we do not know how we would keep a toddler alive with a newborn, so we'll likely keep the nanny to help out.

So there are plenty of reasons for us to have money ready if an unpredictable situation happens or we find a home we want. I'm just wondering if that money should be sitting in a bank account or if it can go in a total stock market index fund in a taxable brokerage account.

1) Given that we have 2 mil saved (1.5 mil in the taxable account), I don't think the market will drop so severely that we won't have any money for an emergency.
2) I don't want to have to take emergency money out of the market at a loss but at the same time the market is more likely to go up than to go down, so it seems like it's better to keep the money in the market than in the bank, correct?
3) I don't want to have to pay taxes on money I take out of the market. But if I'm paying taxes on it, that means that I've made money on it, right? So overall.. still better than the bank.

In this situation would you all save money for a downpayment or emergency fund in the bank or in the market?

As an aside, I've never actually taken money out of the market before (only put money in), so any tips on how to take money out in the most tax efficient way during your high earning years would be appreciated.

Thanks for the advice!

How much is the house you wish to purchase?

Mental accounting: If you want to purchase a 1M house and it is up 15% then emotionally you feel you blew away 150k.

If the house you want to purchase is 500k or over, the potential appreciation in this could be multiples of the potential return on the deposit (150k) in stocks. If the house you want to buy is 1M then you are short something that could appreciate more than your deposit in a year.

With the leverage involved, depending on the cost of the house, the appreciation can be more than you can save per year. Housing booms can last 2 or 4 years (or more if you are unlucky).

Sounds like the housing market has you by the balls as you are short 1 house. I would be more worried about that.
Good luck!

[EntrepreneurMD]

My emergency fund is not for earning money.

I’m fine with the cash drag in my e fund. Helps me sleep at night.

jacoavlu

[TheDangerZone]

jacoavlu

60k in cash drag is a very different story versus 2MM.

[Random1]

I keep some in cash , short term corp, muni fund , total bond fund along with other taxable etfs and stocks. Can always pick one to take out cash if I need it with out too much loss on principle.

[molar roller]

not really about net worth it’s about what’s liquid and realistically what emergency might you encounter that would actually require raiding funds

More so have an emergency “plan”

I mean I have six figure credit limit on CCs, and could get $300k tomorrow from my broker on margin at 2%, owner in a rock solid practice. I know what’s coming. I don’t keep a bunch of cash in savings. No need. I do keep some fixed income in taxable though, and I bonds, bc if s did hit the fan I don’t want to liquidate taxable equities with unrealized gains

note savings for a down payment on a house is different

exactly.
Higher net worth is usually the result of higher cash flow, and typical financial emergencies are non-emergent at that point.

My cash emergency fund is whatever is in my wallet... which could be a few grand or could be nothing, depending on how much cash the previous week brought.
Very little in personal checking, under $10K. No personal or business savings account.
I can easily cash flow a root leak or an engine rebuild, and sadly don't do anything that might require a large bail.
Access to $250K business LOC, margin on a $4M taxable portfolio, and credit cards provide all the emergency funding I might need.

[StarTrekDoc]

Agree with folk that you need to think about the other person in this situation. Financials for many forum members come easy. Not so much with the SO in many cases. If you're the one going down in emergency, they need focus and have an easy executable plan.


Define: EF. 30d/60d/90d/3yr cash burn. Then you'll have more refined answers. Most will define this as a 90day cash equivalent access.

Cash equivalent: Most define this as easy, no-thought access via a simple one step transaction. Either in form of check or card.

Setting these parameters, after getting past broke and a steady cashflow situation - we did this:

EF:
-30day local bank cash on hand
-House Home equity line of credit sufficient for 6m cash burn AND if even max'd out less than 70% of total equity of home.

NearTerm Fund support - sizable for 3 year burn <-this is recent since now FI and want to be ready to pull eject button a moments notice without regrets.
-Tax Exempt Bond fund in taxable

[Jack_Sparrow]

I have always had my emergency fund in stocks. My networth is 300k. If you put your emergency fund in stocks and after 5 years at reasonable gains. The market tanks 50%.. You have exactly as much in your emergency fund as you would have had if you just put it in a savings account and let it ride...

Paying taxes on gains from an emergency fund? Paying taxes means you made money. should be a good thing vs letting it sit.

IMO probably takes a 5-10 days to transfer sale of stock tops. So have to ask yourself what kind of emergency requires you to write a direct withdrawl in that first 5-10 days that can't be paid with a credit card or cash advance from some paycheck prepayment place? I can hardly think of anything over 5k that you don't have at least 10 days to pay it.